Pitting credit unions vs. banks

Most businesses lobbying to sway the looming legislation to overhaul the Tax Code will focus on preserving their own tax perks — not shooting down their rivals.

Not so with some of the nation’s banks.

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Banking sources say tax reform is their best chance in years to change the century-old tax status of their chief competitors. Credit unions are taking an equally aggressive stance, seeing tax reform as an opportunity to solidify support for their tax status.

The public sparring is unusual, violating an unwritten code in tax debates.

“In tax reform there is a sort of Hippocratic Oath: Do no harm. [Industries say,] ‘I’m going to pursue my position and if Congress wants to do something for someone else that’s fine,’” said David Kautter, managing director of the Kogod Tax Center at American University. “’But all I’m going to talk about is how good my provision is and how much I would like you to save it.’”

At issue is the credit unions’ multibillion-dollar annual tax exemption. The federal exemption dates to a 1934 law that sought to give the groups access to give credit to people of “small means,” serving a social service function for the poor and communities forgotten by big banks.

Banks and credit unions have been sniping publicly for years, and both sides say they will step up their lobbying blitzes if the House Ways and Means and Senate Finance committees unveil tax reform legislation in the coming months, as both have pledged.

While the big banks like JPMorgan Chase and Wells Fargo want the exemption gone, the issue is most vital for independent banks, which have struggled since the financial crisis.

Paul Merski, executive vice president of congressional relations for the Independent Community Bankers of America, told POLITICO that repeal of the credit union exemption is his group’s No. 1 priority during tax reform.

Banks argue credit union groups have gotten so large they no longer just serve the poor and needy so they should be treated the same as banks by the Internal Revenue Service.

This summer, the American Bankers Association ran print and radio ads in Washington as part of a campaign to highlight the tax-free status of credit unions. Merski told POLITICO that his group would most likely run additional ad campaigns once the details of any tax bills are unveiled.

“Many tax-exempt credit unions have morphed from serving ‘people of small means’ to become full-service, financially sophisticated institutions,” said ABA President Frank Keating in a letter earlier this year to President Barack Obama.

Banking trade groups are also pushing local associations to advocate ending the exemption, including an effort launched last week by the South Dakota Bankers Association.

Credit unions, for their part, say the fundamental difference between banks and credit unions is their not-for-profit mission — a variance large enough to justify the exemption.

“We’re out there helping consumers get loans and helping consumers acquire and maintain savings, while banks exist to make money for their shareholders,” said Ryan Donovan, senior vice president for legislative affairs at the Credit Union National Association. “They are completely different organizations.”

CUNA has organized “Protect My Credit Unions” rallies nationwide to highlight the millions of people who use credit unions, including members of Congress. Credit union members sent 850,000 messages to Congress during a September advocacy day, the association said.

Washington insiders are skeptical any legislation introduced by eager tax writers will make it past the finish line this Congress, with major obstacles such as division among Democrats over the need to raise revenue and partisan rancor that led to the government shutdown. Still, if legislation does emerge, no one wants an unfriendly proposal on paper.

Banks are still the favorite financial institution for most Americans, but a distrust of the industry after the financial crisis coupled with the lingering effects of the recession have made credit unions a fast-growing competitor.

The institutions boosted membership to 95.7 million as of March, an increase of 2.11 percent from 93.8 million one year ago, according to SNL Financial — twice the growth rate as before 2010.

And despite having a smaller footprint, credit unions exist in all 50 states and the District of Columbia. Some of the biggest are in Republican states or purples ones — including Virginia, Texas and North Carolina.